Check out the real situation

Yes, a Marley reference

Two topics today but before we begin, I want to point out that showbiz, or at least the movie business, has been in fear of death almost since it started. At least since World War II and the onset of television, movie moguls have worried about the theatrical business. During WWII, 85MM people went to the movies every week, which then declined 46% by 1953 as television came in. Since then it has been a constant battle with hills and valleys including the Paramount Consent Decree, the decline of studio contracts and the studio system, CinemaScope, Cinerama, 3D, home video, cable, HBO, Blockbuster, piracy, and finally streaming and social media. Many companies have fallen by the wayside, but we have made it this far and, despite the challenges of the day, and acknowledging that there is much to do, I remain fundamentally optimistic. 

R-Rated Comedy 

What is going on with R-rated comedies? Drive Away Dolls opened to $1MM on Friday including $400K in previews. This is after Joy Ride and Bottoms bit the dust and while comedy has been sucking wind for a few years. My point is not that comedy is bad but that people are not trying to succeed in this category. 

I’m being nice. Here are the top 10 R-rated comedies for 2023 and 2024:

A bunch of these are specialty films that happened to stumble into the R-rated comedy category. And Jennifer Lawrence carried No Hard Feelings, a weak comedy premise, on her back. 

I think this is the easiest opportunity in movies right now. You might say horror is, but I think a lot of people will be producing horror because it has been doing so well so it will be very crowded. 

SVOD Strategy in a Bind?

Zoom out and you will see that Paramount, Warner Bros. and Disney are all in similar situations. Generally they have some TV assets (ABC/CBS/Discovery) that are profitable but shrinking; they have a TV/movie studio that is mildly profitable but doesn’t really shrink or grow and isn’t big enough to make much of a difference anyway; and then they have a streaming service. The streaming service is their only possible growth story. (Yes, I realize that Disney is a little different because of the parks but I think this analysis still applies.) 

Interest rates have gone up so investors are less inclined to lose money today for the sake of money tomorrow. So what the studios are doing is that they are trying to run their SVOD services at break even or to eek out a slight profit. Therefore they have been pulling back on investments in the services, even canceling completed films. This has led to them generally losing customers in their biggest market, the United States. However, at the same time, they’re promising that over the next few years they are going to deliver robust profit growth in streaming. But how robust? To make a difference, to really save the day and make up for the decline in regular TV, these streaming services have to grow from break even to throwing off billions of dollars in free cash flow – at least $5 billion per year. That’s very significant growth while remaining cash flow positive or neutral. It’s almost … hard to believe. 

I understand that there are some built in improvements to look forward to. Warner Bros. is gradually bringing foreign territories online (France and Belgium next year I believe) and will have a Game of Thrones prequel series and a Harry Potter series hit the site in 2025 and 2026 respectively. But even with one or two big shows on the way, I don’t understand – and do they? – how they are going to transform their services from being roughly break even, and shrinking, to rapidly growing and being extremely profitable while they simultaneously maintain an extremely parsimonious programming philosophy. 

Having done it myself, that worries me and I just think there seems to be a lot of hope in these plans. 

I think there are only two approaches that make sense. One is to combine services, which everyone understands and intends to pursue, either through an actual merger or some sort of JV at the service level. That is a good idea. 

However, deals with third parties are out of your control. So you have to have a backup plan. Here is my suggestion. Jeff Bezos used to say that Amazon was “willing to be misunderstood for long periods of time.” The backup plan has to be that starting now you are going to do the opposite of what Wall Street is telling you to do and what in Disney’s case Nelson Peltz is telling you to do (Peltz is the activist investor who wants Disney to increase margins at their streaming service). The key is that if you are currently shrinking in your biggest market, the services have to ensure that that turns around. I expect that even though Hollywood has fallen off its peak TV pace of 600 TV series per year due to the strikes, it will have to consider, and these companies in particular will have to consider, reversing their present plans and pumping an extra billion a year or so into original series, each, to make certain that their growth trajectories become dramatically positive. At the end of the day, the stock price is the discounted value of the future cash flows and the only way those become significantly larger is if future projections credibly show dramatic growth in streaming. None of the current plans are reassuring about the dramatic growth.  

The correct strategy is to spend more, about $1 billion per year, even if that may agitate analysts for a period of time. The path to $5B in EBITDA at the streamer must be credible, which now it is not.

Trying Our Best

Let me get back to the R-Rated Comedy issue. For multiple years, Hollywood has not been trying its best and it has cost the industry billions of dollars. It has cost market share versus YouTube, TikTok and everything else. It has simply made Hollywood less appealing and competitive and profitable.  Disney is worth $164 billion less than it was worth two years ago. Paramount has lost over 80% of its value. Warner Bros Discovery has lost two thirds. Some entertainment entities are protected within much larger and very profitable entities (Amazon, Apple, Peacock) so they exist in a sort of “nothing matters” world, but most do not and it’s been a tough time for them. I want to make the case that this is not a hobby where you should put politics first. This is a business. Tremendous damage has been done. People need to refocus on the business. 

How is Hollywood not trying its best? Well, as everyone knows, a lot of choices have been made for years now that are just not rational business choices. The situation with respect to R-rated comedies is simply a group of people saying that they do not like The Hangover or Tropic Thunder or anything like that. Why? Because they don’t. That’s why. There is no other explanation for it. And maybe they don't like movies that target guys. It’s just not ala mode. 

That is not customer friendly. 

For a specific example of odd, political behavior, look at Lucasfilm. Who is directing the next Star Wars film? Sharmeen Obaid-Chinoy. I’m sorry, who? Obaid-Chinoy has directed a bunch of Pakistani documentaries and two episodes of Ms. Marvel, which got a 6.3 on IMDb and generally was not looked on as a winner. But her episodes must have completely smoked it because now she nabbed one of the plum directing assignments in town. That is kind of unbelievable. I mean, if this were a $20 million caper, fine. But Star Wars? 

Meanwhile at Amazon, they are stuck in sub-7 IMDb land even after adjusting IMDb, which they own, to create some grade inflation. Expats: 6.1. Mr. and Mrs. Smith: 6.9. Second Best Hospital in the Galaxy: 5.6. Citadel: 6.2. Five Blind Dates: 4.9. Candy Cane Lane: 5.6. Unbelievable. My average IMDb rating for a season of TV is 8.1. I don’t think I ever did a season that was below a 6. A “7” is really the minimum for decent and, statistically, we determined that numbers below that actually had a negative effect on subscriber growth. 

Why is this all happening? Obviously it’s about people and material … and politics. Across town, there is a lot of weird politics-driven hiring, a lot of people are on the bench for no good reason, and a lot of genres are being handled without regard for their popularity with customers. This extends beyond writers and directors to executives. Some people think one exec is as good as another, but I have found that the ability to distinguish great material from good material is rare; and, once you have a script, to be able to bring together all of the right elements to bring that material to life with a tone in step with the cultural moment on budget and on time, … is an equally rare ability. Maybe one exec out of fifty is truly high impact. The rest are just setting up meetings and conveying information. And at any given time there are usually seven or eight very strong execs in the business. You have to find these people and bet on them. If you disturb this process at all, which I discussed earlier (in What Do We Lose When Hollywood Goes Pass Fail?), you will get bad results and the first thing to go will be the best material. Which is exactly what we have been seeing. 

Do you know why Travis Kelce is the tight end for the Kansas City Chiefs? Because he is the best tight end in the world. That is how Hollywood needs to hire if it wants to thrive.

Perhaps you saw what happened with Google’s AI, Gemini, this past week. Gemini was so biased, or woke, that it could not produce (or had great difficulty producing) images of white people and had various other completely absurd problems. Within Google, this probably seemed fine and did not seem like an error. It’s just part of their totally cool “activism.” But to consumers, it seemed very broken and was widely rejected. This is a problem now for Google because the AI market is competitive, so they completely withdrew the product. Google might be able to come back in consumer AI, but they might not.

Similarly, we do not know when the audience is going to reject Hollywood or the extent to which they already have. Disney has become a divisive brand. There are warning signs. As Natalie Portman declares the movie business “niche,” this is nothing to play with. People are getting annoyed.

What I am trying to calmly say, now that the airplane has nose-dived from 30,000 feet to 10,000 feet and continues to head down, is that it is time to try to focus on delighting customers and making money. Programming decisions should be made with customers in mind and whoever is best at their position should be playing their position. I think we are at a “By the way, is there anyone on board who knows how to fly a plane?” moment.

Airplane! (1980) "BTW, is there anyone on board who knows how to fly a plane...?"

With respect to the optimism I referred to in my first paragraph, I want to add one proviso, which is that I am optimistic – so long as this issue can be left in Hollywood’s past. At the end of the day, none of these plans will work out without our best movies and TV shows.

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Roy Price was an executive at Amazon.com for 13 years, where he founded Amazon Video and Studios. He developed 16 patented technologies. His shows have won 14 Best Series Emmys and Globes. He was formerly at McKinsey & Co. and The Walt Disney Co. He graduated from Harvard College in 1989.